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Blockchain: Disruption or distraction?

Blockchain has been trumpeted as a technology that could reshape the way businesses transact across the global economy. The platform is gaining prominence for its ability to share information securely and ensure the integrity of data.

This new technology was first introduced to the world in 2009 through the rise of the cryptocurrency, Bitcoin. Since then, many other applications and use cases have emerged, some claiming to be revolutionary.

Bitcoin (Public Domain Pictures)

Indeed, the removal of centralised institutions, the redistribution of trust, and the creation of a worldwide ledger of value are some of the promises of blockchain projects that have stirred excitement in the market. Many business leaders ask: is blockchain a disruption or a distraction?

Before jumping on the bandwagon or dismissing the technology as complete hype, it would be worthwhile for business leaders to understand the utility and function of blockchain, its benefits and limitations, as well as the adoption and implementation considerations.

Beyond just a database

Blockchain is commonly described as a distributed ledger – simply put, a decentralised database. Managed by peer-to-peer networks, blockchain allows transactions to be managed without a central authority.

Peer-to-Peer Networks (Pixabay)

Transactions are validated by the network before being grouped into blocks. These blocks are linked to the previous block chronologically (hence, the name “blockchain”) and secured using cryptography. This bundling of blocks produces an immutable shared record of truth. In addition to preventing the tampering of existing data, this structure only allows transactions to be added to the database. Altering or deleting previously entered transactions is not possible.

Skeptics have argued that blockchain is just another database, so what’s the hype about?

For the past few decades, Enterprise Resource Planning (ERP) systems have been implemented as the backbone of data and process integration of companies. The maturity of ERP systems have ensured that end-to-end processes such as procure-to-pay and order-to-cash are integrated seamlessly within a company.

However, integrating end–to-end operations beyond the organisation to cut across a business ecosystem is not as straightforward. Every company has their own ERP and operational systems, and rarely do these integrate. When these do, it is through Electronic Data Interfaces (EDI) files that take time and effort to reconcile.

This is where blockchain technology makes a key difference, with its potential of integrating the data and processes across companies and business ecosystems.

Take an end-to-end supply chain and logistics process of a manufacturing ecosystem, which typically involves the sourcing of raw materials, manufacturing, transportation, warehousing, to sales and support. Each step of the entire process could be undertaken by different companies using different systems, and could well continue to be so. Yet, blockchain can serve as the platform that links these different companies and their respective ERP or operational systems together.

Limitations exist

Limitations (Wikimedia Commons)

Blockchain projects are moving beyond proof-of-concepts and prototypes to production systems. Its permanent and chronological nature makes it well-suited for recording, managing and tracing transactions.

Many current blockchain implementations are about time-stamping and notarising information, essentially to prove history and origin. However, these are not optimised for business transactions. To realise the full value of having an end-to-end transaction on a blockchain, there needs to be a shift from notarisation to tokenisation.

Tokenisation is the process of converting the ownership rights of a real world asset into a digital token on a blockchain. Assets, represented as digital tokens on a blockchain, can be bought, sold and exchanged but cannot be duplicated, just like Bitcoin. In that light, fiat currencies (currencies that are declared legal tender) can similarly be tokenised.

Although tokenisation is more demanding than notarisation as structured data is needed, it provides the critical function and benefit of moving value, in addition to information, across the blockchain. With tokenisation, transacting economic contracts between participants becomes possible on blockchain. The tokenisation of fiat currencies will then allow full cycle economic contracts to be completed on a blockchain.

Building a business case

Notwithstanding the potential of blockchain technology, its adoption will only be as pervasive as the merits of business cases in doing so. Business leaders will need to carefully consider a few factors before entering into a blockchain ecosystem.

Firstly, at this point in time, the move from prototypes to production systems will likely be costly and time-consuming. Business leaders will need a clear business case to justify the investments. Rather than relying on hypothetical benefits, business and operational stakeholders will need to be involved and consulted so as to determine if real benefits can be materialised.

Often, the litmus test is: can the proposed benefits be achieved by deploying a traditional centralised system instead of a blockchain platform, where the former is likely to be less complex and costly?

Secondly, business leaders must learn to operate with a paradigmatic shift in mindset and process. Unlike an ERP system, which CFOs and businesses have been relying on for a “single source of truth”, a blockchain platform would have “multiple sources of truth”.

Blockchain platforms have various protocols governing consensus and different architecture to determine access, depending on whether it is a private or public blockchain. Given that specialised technical know-how is required, it is crucial for business leaders to be equipped with the right advice to determine if the blockchain platform will function as professed.

Thirdly, transactions are executed on a blockchain through programs known as ‘”smart contracts”’. This is unchartered territory. Regulators have differing views on how to approach this. Business leaders will need to understand and comply with the regulatory and legal boundaries of a “smart contract” in their geography of operation as and when these evolve.

Clearly, blockchain technology has the potential to integrate entire business ecosystems, akin to how ERP systems were able to integrate information systems for the entire enterprise. As blockchain technology primarily impacts databases, it is a foundational technology that will take time to mature.

Businesses and regulators will also need to come to agreement on how a blockchain ecosystem will work and be governed, and new rules and regulations will continue to be introduced and evolve as the ecosystem matures.

The industrialisation of blockchain is just beginning. Its transformative impact will be truly felt when blockchain networks move value the way the web moves data.

The author is Partner and IT Advisory Leader at Ernst & Young Advisory Pte. Ltd.

The views in this article are those of the author and do not necessarily reflect the views of the global EY organisation or its member firms.

This article is part of a series is brought to you by CPA Australia to share knowledge on topical issues relevant to business, finance and accounting.

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